The Real Secret Behind The Secret Investment Tip

| June 16, 2016

secretRecently on several other websites, a “secret investment method” was revealed.  The beauty of this secret is that it worked every time in the past.  Impressive since it did not require knowledge of algorithms or how to read a MACD, RSI, or Bollinger Bands chart.  The only thing it required was the ability to look back three calendar years on a chart.  The “secret” was to ask yourself, “Has this stock/index/commodity declined year-over-year for three straight calendar years?”  That’s it.  How could something this simple be considered a secret?  The answer is that it does not happen very often.  And when it does, the majority of investors do not take advantage of it.  So it’s only a secret investment method because only a few actually bother to employ it.

Finding these bruised and battered assets is more difficult than you would imagine.  Even if you look in highly cyclical industries like energy and agriculture, three bad back-to-back years rarely show up.  When they do, it is an excellent contrarian or deep value investment that will outperform just about anything anywhere from 30% in a matter of weeks to 2x or 3x in 6-12 months.  This is good information – but what good is it if you cannot find anything to use it on?  A close second to the Three Bad Years method is the Down 80% or More method.  If an asset (stock, index, or commodity) is down more than 80% off its peak price, then it’s a buy.  The Down 80% or More method will give you more opportunities more often, so you can embrace your inner deep value investor.

Chesapeake Energy (CHK) is a good example of the Down 80% or More method.  This company and its founder, Aubrey McClendon were the darlings of the business world.  McClendon was a bold and daring CEO who built an energy empire in natural gas.  That was when natural gas was over $11 per mmBTU.  Now at less than $3 per mmBTU per barrel, he does not look that smart.  Actually he does not really care because he died in a car accident in March 2016.  Prior to that, 2015 had been dismal for CHK.  Natural gas continued to stagnate or go lower in price and the share price plummeted as well.

However, this year has been much better for CHK with a quick 50% gain in the first few months.  All you had to do was buy on the opening day in January.  There have been other good indications as well that the worst is over for CHK.  Last month CHK reported that they were selling assets to raise cash and that they had not lost as much money as expected.  Plus, they swapped debt for equity which is sometimes the only way to dig yourself out of a financial hole.

Even if you had not read the news on CHK or known anything about energy and natural gas, you still could have made money on it by just looking at the chart.  The share price reached a peak of $70 in 2008.  By the end of 2008, it had fallen to $10.  Using the Down 80% or More method, you could have bought at $14 ($70 minus 80%) in early 2009 and doubled your money in two years.  Recently, CHK reached another peak of $30 in 2014 and by the end of 2015, it was under $5 per share.  Since it was down more than 80%, you could have bought on the first trading day in January and had a 50% increase by the end of April.  Too many people stay away from investments of any kind because they do not understand what they are investing in.  With the Down 80% or More method, that level of specialized knowledge is not required.  All it takes is the ability to read a chart and follow good money management (scale in your purchased in 4 or 5 pieces).

This method works best on cyclical or consumer industries like mining, agriculture, retail, energy, or anything that people buy on a regular basis.  Your car does not run on video games and you cannot eat cancer drugs.  People will always need food, gasoline, and electricity and these industries will always have customers – it is just a matter of how profitable they are at delivering it.  And the people running these companies make mistakes just like anyone else, and their actions affect the stock price as well (but not for long).  Leadership either learns from their mistakes or they are replaced, and generally the fortunes of the company turn around.


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Category: Natural Gas Stocks, Penny Stock Tips

About the Author ()

Brad Hartung is the author of The Speculator’s Handbook and the blog, Small Cap Pirate. He specializes in making sound investment decisions in stocks that have the potential to significantly grow in value like biotech and junior resource mining.